When bringing new employees on board, your business may provide applicants you want to hire with offer letters. In interviews, managers may make certain positive statements about the financial condition of the company in order to entice candidates to take the jobs. And after being hired, employees may sign employment contracts and be given employee handbooks.
Through all of these hiring steps — and other actions — your business may be making job security promises. In the future, employees may be able to argue that you promised them jobs for as long as they wanted. Reason: Certain statements can be treated as binding contracts, and even verbal statements can be considered implied contracts.
Managers and supervisors acting on behalf of your company can create contracts as binding as those made by the chief executive officer.
We’ll show you the types of statements that can get your business in trouble, but first, here are the key differences between offer letters and employment agreements:
An offer letter is a brief document offering a position to a candidate to whom you have already verbally made an offer. It should not contain statements about issues such as salary, benefits, possible disciplinary actions or the duration of the job. No statement should be able to be misconstrued as a promise. These letters generally contain an “at will” statement. This makes it clear that either the employer or the employee can terminate the relationship at any time for any legal reason. This means employees can be terminated without “just cause.”
There is no legal requirement to put offers in writing, although many companies use offer letters and many job candidates ask for them. Consult with your attorney about whether your organization should put offers in writing and what language should be used. Letters that are not carefully drafted could inadvertently create an employment contract or other claims.
An employment agreement is a more formal, length legal contract. It generally contains basic information such as the name of the employee, job location, title, duties, and the employee’s supervisor. As with an offer letter, there is generally an “at will” statement. The exact provisions in an employment contract vary (see right-hand box) but the agreements should be drafted by your attorney to ensure there are no unforeseen issues.
Here are some examples of the types of job security assurances supervisors and managers should avoid in all written documents and conversations:
- While interviewing a job applicant, a company vice president says, “Our company is financially solid. We’ve never had a layoff.” If the company eliminates the employee’s position six months later because of budget cuts, the employee may argue the vice president’s comment implied job security.
- Managers make statements to employees such as “You’ve got a job here for as long as you want,” or “We’re like a family, so you’ll never have to worry about being let go.” These types of statements can imply job security.
- An offer letter states: “This position will last until the project is completed.” This is a promise of job length. Employees may argue the company breached a contract if they are terminated half way through the project.
- In order to improve morale after some layoffs, a company states in a letter to remaining employees: “We want you to know we will make every effort to avoid further layoffs. This does not mean that we won’t fire anyone for good cause, such as poor performance or criminal activity, but we are committed to job stability.” An employee who is laid off in the future could charge that he letter created an employment contract that allowed termination only for just cause.
- An offer letter or an employment agreement states: “You will be eligible for two weeks of vacation next year and three weeks the following year.” That could be implied as a guaranteed multi-year contract.
- An employee handbook states that after a three-month probationary period employees become “permanent” members of staff. A court could interpret the language as a promise of job security.
Here are two examples of how courts have ruled in cases involving written and verbal statements made to employees who sued the companies after they were terminated:
- An employee was fired without warning or suspension. He sued the company charging wrongful termination. The employee handbook he received his first day on the job stated that the employer made terminations only after issuing written warnings. The court ruled the employer could not fire the individual without following the procedures laid out in the handbook.
- An employee argued that his employer violated a contract by terminating him. During the interview, the employee told the hiring manager that he needed a three-year contract. He took notes, including information about salary and benefits over a three-year period. At the top of his notes, he wrote “Contract” along with the name of the company. He gave the notes to the hiring manager and asked for a signature. The manager signed them. A year later, the employee was fired and sued for breach of contract. The court ruled the signed notes did create a contract.
Best practices. Have written documents such as offer letters, employment agreements and employee handbooks drafted or reviewed by your attorney. Train managers and supervisors about what to tell applicants and employees about job security. This includes avoiding any oral or written statements — either clearly or implied — that may be construed as elements of enforceable contracts.
An Employment Agreement May Contain the Following Provisions:
- Salary or wages – It may also address bonuses, stock, profit sharing, employee benefits, business expense reimbursement and severance pay.
- A confidentiality or non-disclosure agreement, which prevents employees from divulging information about an employer’s operations, processes, trade secrets, products and other aspects of the business.
- A non-compete clause prevents an employee from competing with a company after the end of employment. These provisions should be reasonable in scope or they may not be enforceable. For example, courts would not likely uphold a clause that prohibits an employee from working for any competitor in any geographic area for 10 years. It would likely be seen as unreasonably preventing the individual from earning a living. Note: Laws regarding non-compete covenants vary from state to state. Courts in California, for example, reject non-compete agreements because state law makes them unenforceable except in limited circumstances.
- A non-solicitation agreement states that if employees are terminated, they cannot solicit business from the company’s confidential customer list. It can also mean that the individuals cannot hire former colleagues to work for a new employer. These agreements generally last for a specified time and may be limited to a certain geographic areas.
- Moonlighting provisions prohibit full-time employees from having jobs on the side without the company’s approval. These clauses may be limited to employment at similar types of businesses and competitors.
- Intellectual property clauses state that the employer owns inventions or work created on the job.
- A morals clause states than an employee may be terminated for engaging in behavior that could embarrass the company or be detrimental to its interests, such as illegal activity.
- Arbitration and choice of law provisions state that disputes will be resolved through arbitration rather than in court. They also may name the state laws that will govern the arbitration process.